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D/3254.
3rd March, 1947.
THE BACKGROUND
OF THE
ECONOMIC SURVEY FOR 1947.
"The task of directing by democratic methods an economic system as large and complex as our own is far beyond the power of any governmental machine working by itself, no matter how efficient it may be." (para. 27)
Nevertheless, this is what the Government has been attempting to do. The principal weapon employed for the purpose has been, not economic management but inflation, that is, undertaking financial commitments far in excess of the physical resources available to meet them. In an effort to escape from the customary consequences of such a policy, namely the vicious spiral of prices and wages chasing each other upwards, the Government has devised a complex system of controls including rationing, utility production, price control, cost-of-living subsidies, and foreign exchange control.
These controls, while they have been successful until now in preventing in the sphere of consumers' goods a runaway inflation of the type with which the world became familiar after the first world war, have nevertheless led to a state of affairs which was picturesquely described in the recent "Statement on Economic Considerations" as a condition in which "there is too much money chasing after too few goods".
Since it is impossible for the Government to ration everything, this steadily mounting pressure of inflation eventually broke through at an unguarded point, namely unrationed electric supply. While the damage caused at this point has been spectacular, it is important to realise that this inflationary pressure has been making itself increasingly felt in a number of other directions, notably railway travel, smoking, entertainment and the progressively increasing demands for the services of the gambling industries.
However, had the effects of inflation been confined solely to the sphere of consumers' finished goods and services, our current situation would not be anything like as serious as it in fact is to-day. A feature of the present situation which has been brought out into the open by the present crisis is that the effects of concealed inflation coupled with rigid controls has had far more disastrous consequences in the sphere of production than in the field of consumption.
If in the field of production demand is markedly in excess of supply, and the price system is prevented from fulfilling its time-honoured function of ringing a warning bell that a shortage is imminent, there emerges a condition of creeping paralysis caused by a progressive depletion of stocks of various kinds of materials and components, the emergence of bottlenecks, and a progressive interruption and slowing down of the flow of production.
Paralysis had been creeping over the industrial system long before the great frost held up the movement of fuel and power. Production was becoming increasingly entangled in shortages, and each attempt to remove a shortage in one place caused shortages to appear in another place. The movement has been cumulative, since the bulk of the projects and expenditures to which this country is committed have been of an expanding kind, with the result that their calls on our limited supplies of labour, fuel and raw materials have been expanding also. The same has, of course, also been true of the process of change-over from a war footing to a peacetime basis in general. At the end of eighteen months of reconversion British industry has reached a point at which it must either sort itself out, or come to a standstill.
The problem of sorting out is not going to prove easy. It involves two sets of measures. The aim of the first should be to increase supplies, the aim of the second to decrease demand, that is to say, to cut our coat according to our cloth.

D/3254.
3rd March, 1947.
THE BACKGROUND
OF THE
ECONOMIC SURVEY FOR 1947.
"The task of directing by democratic methods an economic system as large and complex as our own is far beyond the power of any governmental machine working by itself, no matter how efficient it may be." (para. 27)
Nevertheless, this is what the Government has been attempting to do. The principal weapon employed for the purpose has been, not economic management but inflation, that is, undertaking financial commitments far in excess of the physical resources available to meet them. In an effort to escape from the customary consequences of such a policy, namely the vicious spiral of prices and wages chasing each other upwards, the Government has devised a complex system of controls including rationing, utility production, price control, cost-of-living subsidies, and foreign exchange control.
These controls, while they have been successful until now in preventing in the sphere of consumers' goods a runaway inflation of the type with which the world became familiar after the first world war, have nevertheless led to a state of affairs which was picturesquely described in the recent "Statement on Economic Considerations" as a condition in which "there is too much money chasing after too few goods".
Since it is impossible for the Government to ration everything, this steadily mounting pressure of inflation eventually broke through at an unguarded point, namely unrationed electric supply. While the damage caused at this point has been spectacular, it is important to realise that this inflationary pressure has been making itself increasingly felt in a number of other directions, notably railway travel, smoking, entertainment and the progressively increasing demands for the services of the gambling industries.
However, had the effects of inflation been confined solely to the sphere of consumers' finished goods and services, our current situation would not be anything like as serious as it in fact is to-day. A feature of the present situation which has been brought out into the open by the present crisis is that the effects of concealed inflation coupled with rigid controls has had far more disastrous consequences in the sphere of production than in the field of consumption.
If in the field of production demand is markedly in excess of supply, and the price system is prevented from fulfilling its time-honoured function of ringing a warning bell that a shortage is imminent, there emerges a condition of creeping paralysis caused by a progressive depletion of stocks of various kinds of materials and components, the emergence of bottlenecks, and a progressive interruption and slowing down of the flow of production.
Paralysis had been creeping over the industrial system long before the great frost held up the movement of fuel and power. Production was becoming increasingly entangled in shortages, and each attempt to remove a shortage in one place caused shortages to appear in another place. The movement has been cumulative, since the bulk of the projects and expenditures to which this country is committed have been of an expanding kind, with the result that their calls on our limited supplies of labour, fuel and raw materials have been expanding also. The same has, of course, also been true of the process of change-over from a war footing to a peacetime basis in general. At the end of eighteen months of reconversion British industry has reached a point at which it must either sort itself out, or come to a standstill.
The problem of sorting out is not going to prove easy. It involves two sets of measures. The aim of the first should be to increase supplies, the aim of the second to decrease demand, that is to say, to cut our coat according to our cloth.